Ask Colin

How will quatitative easing affect investing?

The detailed question was:

What effect, if any, does so called Quantative easing have on the investment cycle? Could Quantative easing be considered a new era or new paradigm in this instance for us to consider and deal within our strategy? and How could it affect the strategy of the Bull Market Phase 3?

My view of quantitative easing and other measures such as low interest rates, credit expansion and infrastructure spending is that through these measures China and the US saved the world from another great economic depression. At worst, most countries have suffered only a mild recession, albeit prolonged in many cases.

What these measures have done is to ensure that the credit system did not implode as it did in the 1930s and so far inflation has been avoided.

My view is that quantitative easing will stay in place while needed, but once we are past the risk of deflation and inflation picks up again, it will be unwound, pulling the liquidity out of the system again. Purchased bonds will be allowed to mature and the cash taken out of the system, or else the bonds will be sold back into the market, again taking liquidity out of the system. This will require clear-headed decision-making, which so far is well in evidence in the US and in China.

This cycle is somewhat unusual in its amplitude and period, which has necessitated somewhat extreme measures. I am very glad that they were taken. So far, it has not caused the bull market to go into a speculative phase, so at this time there is no implications for phase analysis.